Business and management

Germany’s gold reserves

Schwarz-Rot-Gut!

“BRING our boys home” was a popular call in 1960s America at the height of the Vietnam war (though it took until the following decade to get a result). The slogan “bring our gold home” has been the subject of a similar emotional outcry in Germany for the past two years. And on January 16th the cause’s champions won a partial victory.

At issue are the 2,355 tonnes of gold that the Bundesbank keeps abroad as the major part of Germany’s 3,391-tonne stash of gold reserves. At the height of the euro crisis in 2011 nervous investors began to ask: “Are our gold reserves safe?”; “How do we know they won’t be seized by foreign powers?”; “Might someone be clipping bits off those gold bars lying in New York and London?”

A campaign was started, to prod the Bundesbank into repatriating its gold. The bank’s communications department was faced with wearisome lists of questions: how the gold was stored; how much did storage cost; how often were the gold bars assayed; could they get mixed up with third-country gold, how much was on loan to third parties? So why not just bring it home?

“Whether such a relocation makes sense is a question of business policy,” the Bundesbank replied sniffily in December 2011 “One must bear in mind,” it explained elliptically, “that to fulfill their role properly as a reserve currency, gold reserves are best mobilised through a diversification of storage without logistical constraints.”

But the Federal Audit Office, in a report to a parliamentary committee in October, criticised the Bundesbank for failing to monitor its gold reserves abroad as carefully as it does those in its vaults in Frankfurt. As a result, Germany’s central bank announced plans to draw up a proper inventory—but insisted that keeping gold reserves abroad, rather than at home, made it easier to raise foreign currency if necessary.

Then on January 16th came a volte face. The Bundesbank said it would be repatriating 674 tonnes of gold from Paris and New York between now and 2020. But this is only a partial victory for the activists: 50% of the Bundesbank’s reserves will remain in London and New York.

Doubtless defenders of Germany’s gold will be on the alert to monitor the bars rolling out of Paris in a sealed train, just as other activists regularly track the progress of rolling-stock carrying nuclear waste—for burial in a salt mine at Gorleben in Lower-Saxony. Another subject close to German hearts.

It is sad to realize that there are so many Germans who think holding less than USD 150 Billion in gold (a scandalous object of wasteful efforts for 21st century humans, really) abroad can pose an economic risk for Europe's biggest economy. This is a country which generates a trade surplus higher in value than its entire gold reserve, every year, and was for years the leading exporter of the world, in an economy of more than 2.5 trillion. Fret not about the car parked on the street, Germans, your wealth is inside your home.

Paris chose to tax its (once world-beating) financial sector out of existence, so holdings of gold in Paris aren't especially useful (except out of inertia).

As a historical note: the reason most of Germany's reserves were held outside of Germany (unusual for rich countries) is to hedge against a Soviet invasion (i.e. resistance fighters & government in exile should retain ownership of the nation's gold). That threat has gone, so a bias towards incremental repatriation seems sensible.

Most Dutch gold is held in NY as well. I wish our government had the guts to ask for its repatriation. It has been there since 1940, smuggled out the day Germany invaded NL, and never brought back. Nobody has even been allowed to check that it's still there.
The last time we wanted our money back from the NY Fed, we were told not to worry, we pushed anyway against strong diplomatic objections, and a few weeks later Richard M. Nixon left the gold standard. Moral of the story, don't trust foreigners/strangers with oodles of your money.

A quick look at history: USA confiscated all German property (world war I). In 1933 the USA "devalued" gold from about $20 to 35 (in other words, stole nearly half of what it had previously promised foreigners). In 1970, the USA did away completely with the facade of a gold standard. In retrospect, the French are not complete idiots: DeGaulle sent his navy over in the 1960s to get some of the gold in New York.

It would have been nice to read a clear explanation of why any country would keep its gold reserves on foreign soil, and along with that some mention of which other major countries regularly do so. The closest we get to an explanation is that storing one's gold in foreign vaults somehow makes it "easier to raise foreign currency." It's not at all obvious why this should be so. The matter of foreigners confiscating, shaving, losing, or replacing it seems like a legitimate concern that has to be weighed against whatever the convenience is in foreign exchange terms. The keeping of gold is disaster insurance, and as such it seems reasonable to keep it as securely and as close to home as possible. Gold is compact and requires no special environmental conditions for long-term storage. All that it needs is a secure vault, which can be constructed in lots of places.

It is sad to realize that there are so many Germans who think holding less than USD 150 Billion in gold (a scandalous object of wasteful efforts for 21st century humans, really) abroad can pose an economic risk for Europe's biggest economy. This is a country which generates a trade surplus higher in value than its entire gold reserve, every year, and was for years the leading exporter of the world, in an economy of more than 2.5 trillion. Fret not about the car parked on the street, Germans, your wealth is inside your home.

So the Germans are removing all their gold stored in France yet they are leaving considerable amounts in London and New York, very interesting. Perhaps the Germans know something that the French should know yet don’t know and this begs the question do the British and Americans know or not know what the German know yet the French do or do not know ?

Hi,
Schwarz-Rot-Gut! Strangely enough as I’m lead to believe most of the gold to returned comes from Paris and those by the Bank of England will stay put. Politicians have demanded random checks for authenticity control. They didn't mention mercury measurements

But why incremental repatriation? It's not difficult to ship back all of it at once. You can fit all of Germany's gold into a small cargo plane.
Countries that have no reserves in the US seem to be doing fine with forex trading: India, China, Singapore. Sounds like a lame excuse to me.
Besides why keep your gold with a country that has a history of not honouring its obligations? Like Nixon in 1970. That was basically confiscating part of your gold because whatever USD value you thought you had you had to buy back in the open market.

It is not just the German reserves that the activists are after, but rather the mechanism that makes NewYork and London the place to hold gold reserves. I bet after achieving the objective of retrieval of the German gold from other countries and building a big fancy advanced storage facility in Frankfurt, the activists will move to become the storage facility of choice for half of Eastern Europe and Latin America.

I see this more of a small move to push London and New York off the mantle and make a play for Frankfurt as a global gold reserve. Now what chance Frankfurt has to compete with New York, I don't know, unless some major gold players start to move their gold out of New York.

True - leaving assets in foreign countries is a bad idea, unless there are strong institutional protections to safeguard the value and accessibility of your investment (as an individual or as a nation).
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Yet when foreign countries buy $5.3 trillion in US treasury bonds, that's precisely what they're doing - leaving vast assets under the jurisdiction of a foreign country, which has shown itself ready to default and to inflate away obligations on multiple occasions in over the past 150 years (most recently in the 1980s).
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Buy bonds like that, and expect to get them back in real terms? That would require either (1) a bigger fool to refinance your the bond that the government owes you, along with the other debts being racked up or (2) a genuine American tax hike & spending cuts. Without much prospect on any count, the obvious conclusion is: stash your money at home, or at least in a plausibly safe country (good institutions, respectable growth prospects & decent public finances) like South Korea, Estonia or Slovakia.
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When private agents (citizens & businesses) demonstrate this kind of "home bias" (they do), the result is terrible misallocation of capital. Lower yielding investments; lower productivity growth; failure for productivity & incomes to converge across nations. This is one of the greatest things about the euro:
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- the euro provides a stable, single, trustworthy unit of account. Inflation this year was 2.2% - close to the 2% target. Since creation, the euro has stayed far closer to the 2% target than the Deutschmark (or indeed, any currency ever) has ever managed. As a unit of account, the euro has an unprecedented record so far (and this is the first responsibility of the ECB).
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- based on the euro as a unit of account, international investments can be made without home bias, providing institutions in the destination country are trusted not to default (same condition as with home investment). If institutions are strong enough (i.e. common eurozone banking regulation), capital will flow to chase yields, resulting in better capital allocation, higher productivity growth and both better security and better return on assets.
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* anybody switching euro to Swiss franc in the past year is going to get a nasty surprise. Most Swiss franc were bought at 1.20/ euro, while the Swiss accumulated masses of foreign reserves. The Swiss aren't going to pay back anything more than 1 euro per CHF 1.30 (and probably CHF 1.40-1.50). Consider it a tax on unpatriotic Greeks & Italians.

No matter how secure you think it is, your gold stored by someone else might always be 'legitimately' stolen. EU countries are much more vulnerable to default as they cannot print cash so in the situation it makes perfect sense to repatriate gold from an EU member but leave gold in own currency areas.

To me a 7 year time frame is an outright admission the gold is not there. The only reason it would take so long is that the Fed needs to buy this amount back in the open market and they don't want to push the price up. If the gold is there in allocated bars the whole operation can be concluded in less than a week either via military planes or a few warships.

Another piece of evidence for that is that no German auditors are allowed to inspect their gold in the US. Why is that? If you buy real estate, jewellery or a company overseas you have the right to inspect it. Why not with your gold?

I'm surprised the German public accepts this. If there is a run on gold Germany may never see its hard earned gold.

The question is "The Central Banks are working for their country or for themselves"? In the first case, I think that all gold reserve MUST be keeped inside the national boarders and even the country is occupied ( by USSR, in this case, as BBC news said), the Bank should fight or die with his own people. As this is not the case and the Central Banks are working for their owners ( and here is the trick, they are called Central or Federal, but they are PRIVATE OWNED), ergo they are free to keep (or move ) the gold wherever, whenever :)))Shakira). There is another problem, though. About the name of this blog. Schumpeter is not even by far an apropriate name for a blog, and form my point of view, no matter how "big" economist he was, he dosen`t deserve the honour to "baptize" a blog with his name. Tomorow I`ll give you some quotes from this character.

If they bury the gold with the nuclear waste, there would be no problems with security or storage costs. It makes no sense to pay to dig the gold out of the ground only to pay to keep it back in the ground. When was the last time the Bundesbank used its gold to raise foreign currencies in an emergency? Follow the lead of France and sell it off.

They have more leverage over the French. The US just can simply say we will give you this and this amount in 7 years and now piss off. And Germany can do nothing about it. They can put a lot of pressure on France via the EU and the bailout schemes.